mm2 Asia - Growth intact

Growth supported by core business; cinemas to build recurring income.

We project mm2 to grow at an EPS CAGR of 50% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contributions from cinema operations and entertainment company, UnUsUal Group.

Contribution from the newly proposed acquisition of 13 cinemas in Malaysia, which would propel mm2 Asia to become a top four player in Malaysia, is expected to be from FY18F onwards.

In terms of its core production business, we expect North Asia, including China, Hong Kong and Taiwan, to contribute > 70% of core revenue from FY17F, up from 23% in FY16.

Upside to earnings could come from more projects, especially in China where budgets are much higher.

1H17 earnings doubled.

mm2 reported a net profit of S$8.9m (+97% y-o-y) for 1H17. We expect a stronger 2H, mainly from the full impact from UnUsUal and the Mega cinemas acquired.

UnUsUal listing.

The successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value, and allow UnUsUal to tap on public funds for expansion.

Valuation

Maintain BUY and TP of S$0.56. We maintain our earnings forecasts for FY17F and FY18F but we have removed the revenue from the Distribution segment, to be in line with the group’s reporting format.

We have also added forecasts for FY19F.

Maintain BUY. Our TP of S$0.56 is pegged to FY18F earnings and peers’ average of 24x.

Key Risks to Our View

No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding.

Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders.

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